Zsolt Darvas is a research fellow at Bruegel. He was speaking to Gary Finnegan.
How significant is the agreement on the 'European Semester' that finance ministers signed off on last week, allowing Brussels to vet the assumptions underlying national budgets?
It's significant and important and moves in a good direction, but I have some doubts about it. Most importantly, I think this could be an effective coordination device for preventing irresponsible fiscal situations in future and avoiding major failures.
However, the deep problem Europe faces is that some countries have very high debt, while others have very poor competitive positions. This European semester doesn't aim to solve these current issues. I see the most important issue as the competitiveness problems facing some Mediterranean countries.
How can this competitiveness problem be tackled?
These countries have to undergo major structural reforms. That can be initiated by the government. The most important thing is to gain competitiveness but to do this you have to either raise productivity – which is easy to say but very difficult to do – or cut labour costs. Cutting wages is more than just an economic policy issue: it's a social issue.
Social partners and citizens have to realise that without solving the competitiveness problems – which means short-term pain in return for long-term gain – they won't benefit from higher economic growth and increased attractiveness for investment.
Does Europe have a role here or is this primarily a national issue?
Restoring competitiveness is difficult and very much a domestic sovereign issue. European partners can't say "cut your wages". So, the European Semester is useful for preventing problems down the line but European partners can't do much about making the kind of sacrifices required to regain competitiveness.
The Commission is preparing a proposal to detect when a country is losing competitiveness, but again, the only solution is for social partners – governments, trade unions, employees – to come together and agree on a way to solve this pressing problem.
How far should wage restraint go? Do you advocate pay freezes or wage reductions?
The wage increases of past five years should be given back. Achieving such a consensus will be difficult.
The Ecofin statement on the European Semester was light on detail. What is your reading of how it will work in practice?
There was not much detail given last week but it has been debated. The Semester allows for surveillance of the broad economic and budgetary guidelines such as assumptions on growth, interest rates and so on. There shouldn't be any country with excessively optimistic assumptions.
It's about the big picture and coordination between member states and Brussels. If something is clearly out of line, they draw attention [to it]. The media would publish the observations and domestic politicians would be under pressure to defend their budgetary outline.
Will some countries find this intrusive and ignore the feedback from Brussels?
There is no choice but to participate. But what countries don't want is interference in the detail of budget. This isn't about detail – it's about the big picture and the main assumptions on which financial plans are based. It could be helpful.
What happens if a member state disagrees with the view from outside?
To my knowledge, there is no binding role for the recommendations. Governments can say they disagree, they can say their assumptions are valid. It will be known by the public, by parliament, by opposition politicians. There will be moral pressure on politicians. Countries might not follow the advice but it will be well known.
Of course, experience shows that member states can be very diverse in their interpretation of the Semester. Some see it just as information sharing, other see it as something important to follow.
How different is this to what is already in place?
Currently, at the beginning of the year, countries give an estimated programme which is later assessed by the Commission. Now, the idea is to help approve the budget draft. The aim is to influence policymaking before it is approved by the parliament.
Is it reasonable that all member states should be subject to such surveillance? Is it not more appropriate for the EU to involve itself in national budgets of a country – like Greece – which has had to ask for a bailout?
Greece received a lot of money from the EU and IMF and assumed obligations which it has to fulfil. If it cannot fulfil these, it gets no more money.
The European Semester is different. There is no money involved – just recommendations. The reason for this kind of exchange is to avoid a repetition of what happened in Greece. Before the crisis there was an optimistic view on Greece from markets. But there was not sufficient control on budget positions.
Finally, will greater oversight over national budgetary planning help get Europe back on track economically?
I'm not optimistic that it will solve all of Europe's problems but it is a small step in the right direction.
